THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

In the financial circles, a story is being told regarding the world economy emerging from the long recession it had entered after the financial crisis. But what is happening in China's economy with the last week's unexpected devaluation and the state of the labour market in the OECD countries refute this story.

Until last week, the Chinese currency Yuan was considered to be overvalued by 15 percent against the dollar. When this level of the Yuan was coupled with the economic growth, it served as a control valve of the deflationary pressure (lack of demand) in the world economy. The devaluation of the Yuan by more than 3 percent last week shows that this valve has been broken and the Bank of China is warning that there could be a continuation of strong fluctuations regarding the value of the Yuan. 

Despite that the Chinese officials try to show that the devaluation is "a reform to facilitate the functioning of the market economy", one can  easily reach a different conclusion. First, the devaluation is not suitable for the Chinese government' project of redesigning the economy towards the domestic consumption, other than encouraging exports. On the other hand,   in today's world economic environment, one cannot expect to have the devaluation to make a significant contribution to China's exports nor to the growth based on investment. 

Second, this devaluation  is an expression of the crisis of capitalism in China. July data show that the growth rates of industrial production, exports, fixed capital investments and retail sales are falling. In short, while the economic growth is going towards below the projected 7 percent, the deflationary pressure and excess capacity problem is getting more pronounced.

Because the Chinese government has chosen the devaluation as a solution and as a tool to encourage exports, one thinks that she has chosen to "export" the deflation at the same time. This devaluation will not only have adverse effect upon the export capacities and growth of the countries in the region, it will also have a negative impact upon Europe's and United States' economies as well as upon the financial stability. The probability that United States' economic growth falls below 2 percent will delay Fed's decision to raise the interest rates and will strengthen the instabilities in the financial markets. In short, the economic recovery story is far from being true.

The story of "recovering from the recession" is also supported by certain declines in the unemployment rates. In reality, not only the unemployment rate is still far below the pre-crisis levels, but also the "recovery" burden of this story, which has a dark side, is imputed upon the workers, especially upon the young people of 15-24 age group. 

Within the newly created jobs, the temporary jobs, which are not standard, while representing 33.4 percent across the OECD, Italy, Greece and Spain have figures that go beyond 40 percent. This ratio is 38 percent in Germany, the strongest economy of Europe. The share of temporary jobs in the total new employment in the 15-24 age group, can reach 69 percent in Spain and 53 percent in Germany. And the chance of the persons who enter into the temporary job market to jump to a permanent job is less than 50 percent. Finally, the average income of workers in temporary jobs is lower than the employees of the permanent jobs. Across the OECD, 22 per cent of family workers in temporary jobs live below the poverty line. 

In summary, OECD is dominated by low growth, high and fragile unemployment, impoverishment and deflation... This situation is not called "recovery" but depression.